Preparing for the 2023 Tax Season

The holiday season is upon us, and tax season will be here before you know it. Filing your tax returns is not exactly a festive time; but, just like the holidays, the season will be less stressful if you’re prepared. Even though 2022 isn’t over yet, preparing now for the 2023 tax season will reduce the stress of meeting the April 15th deadline. Plus, you’ll have time to review your situation for tax saving strategies that could still be available before year-end, such as contributing to a retirement plan.

Whether you prepare and file your own tax returns or engage a tax professional, these three tips will help you prepare for the 2023 tax season:

  1. Inflation Reduction Act

The Inflation Reduction Act covers several new and reinstated tax laws that affect individuals and businesses. One provision allows eligible taxpayers to claim a tax credit for purchasing a new qualifying electric vehicle after August 16, 2022. The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the North America final assembly requirement. More details about clean vehicles and other tax provisions will be available in coming months.

 

  1. Tax Estimates and Withholdings

Did you owe a lot when filing your 2021 returns, or did you get a big refund? An IRS Paycheck Checkup is an online tool to make sure that your withholdings will cover your anticipated tax liability https://www.irs.gov/paycheck-checkup.Taxpayers with investment, self-employment or other non-wage income can check if they need to make a larger or smaller quarterly estimated tax payment by January 15th at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

  1. Organize Tax Documents

Use your 2021 income tax return to identify documents that you’ll need to accumulate in preparation for next tax season. Save the charitable donation letters, real estate tax bills, and other applicable documents in an electronic or physical folder. Add your 1099s, W-2s, and other year-end statements when they are emailed or snail mailed to you. If a life event happened in 2022, like buying a home, starting a business, or changing your marital status, start accumulating the documents you’ll need to address the tax impacts.

Follow these three tips to be prepared for the 2023 tax season. Bonus – the IRS shares updated information on its website and on social media for people to prepare for the 2022 return they will file next year. Check out their latest updates at https://www.irs.gov/newsroom/help-for-taxpayers-and-tax-professionals.

Tax Tips for Service Members and Veterans

The recent passing of Veteran’s Day reminds us that tax season and the filing deadline will be here before we know it. We are also reminded that women and men serving in the armed forces or who are military service veterans face unique and sometimes complex tax situations that can be challenging to navigate.

The IRS knows that service members and their families don’t have extra time to look for what information to collect and all the latest rules to file a complete and accurate federal income tax return. That could result in those members of the military, veterans, and their families missing out on tax benefits specifically for them.

The IRS has online tax resources and information designed to help members of the military community easily find the essential information needed to prepare for the upcoming tax filing season. Their site is one-stop shopping to make preparing for tax season easy. Here is what’s available:

  1. The main page for tax information for members of the military, veterans, and their families is at https://www.irs.gov/individuals/military. This should be your first stop to find links to helpful information, resources, services, and publications. 
  1. Taxpayers need to know their official military status to be eligible for certain benefits. Some benefits extend to contractors or members of support organizations working in a combat zone. See all of the details at https://www.irs.gov/individuals/military/eligibility-for-military-tax-benefits
  1. Women and men serving in a combat zone may also qualify for a tax exclusion and/or a special earned income tax credit, leading to a larger tax refund. Information about qualifying are found at https://www.irs.gov/individuals/military/tax-exclusion-for-combat-service and at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/military-and-clergy-rules-for-the-earned-income-tax-credit
  1. Military members and qualifying veterans can prepare and efile their income tax returns on MilTax for free https://www.militaryonesource.mil/financial-legal/tax-resource-center/miltax-military-tax-services/. Taxpayers who do not qualify for MilTax have other options to prepare and e-file their federal taxes for free. Most military installations offer free income tax assistance.

Veteran’s Day reminds us of the military community and the unique and challenging tax situations that they need to navigate. The IRS has resources to help members of the military community easily find the essential information needed to learn about and take advantage of tax benefits specifically for them. Check out the Armed Forces’ Tax Guide for comprehensive rules and guidance at https://www.irs.gov/forms-pubs/about-publication-3.

New Retirement Contribution Limits for 2023

Retirement plan contributions are often fully or partially tax deductible, depending on the taxpayer’s circumstances. So, it’s natural to think about doing a retirement savings review at year-end and at tax filing time. With only six weeks left in 2022, taxpayers are looking to maximize their retirement saving opportunities before year-end and for 2023. Good timing, since the IRS recently announced the 2023 contribution dollar limits for IRAs and for employer retirement plans.

Individuals who earn taxable earned income, aka compensation, during the year are eligible to contribute to a retirement plan, such as a traditional or Roth Individual Retirement Account (IRA) or an employer-provided retirement plan, like a 401(k) or 403(b). The tax rules for figuring out the tax savings from retirement plan contributions are complicated, and they apply differently to different taxpayers, depending on their marginal tax bracket.

One set of tax rules that applies to all taxpayers is retirement plan contribution dollar limits. Every year, the IRS publishes the dollar contribution limit by retirement plan type. Some years there is no dollar adjustment, but there’s no way to know without checking. Here are the 2023 contribution limits for IRAs and many employers’ retirement plans:

Traditional and Roth IRAs

Total contributions made to all of a taxpayer’s traditional and Roth IRAs for 2023 can’t be more than total taxable compensation for the year, up to $6,500. The limit increases to $7,500 for taxpayers who are age 50 or older, to help those taxpayers who have a shorter time until retirement and need to “catch-up” on contributions to fund their future income needs. Traditional IRAs are tax deductible under certain circumstances related to employer-provided retirement plans and taxable income amounts. Roth IRA contributions are not currently tax deductible, but withdrawals made after age 59½ of monies held for five years or longer are not taxable.

Employer Retirement Plans

Employer-sponsored plans, like a 401(k) or a 403(b), are types of qualified profit sharing plan that allow employees to contribute a portion of their wages on a pre-tax basis to an individual account. The employee contribution limit increased to $22,500 for 2023, up from $20,500 for 2022. The employer may also contribute to employees’ accounts; however, employer contributions do not impact employee contribution limits.

Year-end and tax filing time are the perfect times to do a retirement savings review. With only six weeks left in 2022, there’s a lot of complicated rules to learn to determine the tax savings based on new retirement plan contribution dollar limits. Even more complicated, those rules apply differently to taxpayers with different income levels and for different retirement plan types. It’s all too much detail to include here. Good news – the IRS website has everything that you need to know about retirement plan options, contribution limits and tax savings at https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans.

IRS Expands Service Capacity

Some news reports (and some politicians) would have you believe that IRS budget increases approved by Congress will result in revenue agents knocking on taxpayer doors, asking questions, and demanding money. Those scare tactics are far from reality. Much of those budget increases will go to upgrading systems and adding service staff, both much needed investments to expand IRS service capacity.

Next tax filing season, the IRS hopes to improve on its 10% answer rate for taxpayer calls during last filing season. The Internal Revenue Service recently announced that it passed the 4,000 milestone for hiring new customer service representatives. These service reps were hired over the last several months and are being trained to provide help to taxpayers, including answering phone questions. All part of a much wider IRS improvement effort partially funded by the Inflation Reduction Act funding approved in August 2022. 

The IRS continues to recruit across the country, with a goal to add another 1,000 customer service representatives by the end of the year, bringing the total of new hires to 5,000. Plans are to have most new employees in place for the start of the 2023 tax season. Others will join as their training is completed in the following weeks. The IRS anticipates almost all of the new staff training will be completed by Presidents Day 2023, when they traditionally see the highest phone volumes.

That all sounds positive but remember that some of the new IRS staff will replace retiring workers, therefore not increasing the overall workforce capacity. Taxpayers should continue to first visit IRS.gov for information related to their tax questions. The site is relatively easy to navigate. Answers and general information about many frequent questions are linked from the home page and can usually be found much faster than by calling. Plus, taxpayers can bookmark the page and refer back to it as many times as necessary.

If you’re looking for a career (or career change) but a customer service representative position is not a good fit for you, the IRS is also working to hire people for other positions throughout the agency, like in Information Technology and compliance – all with a goal of improving IRS work quality and capacity. Even if you never thought of working for the IRS before, it could be a great option. They certainly aren’t going out of business or running out of work anytime soon.

The IRS is expanding service capacity with its recent budget increase by hiring 5,000 new customer service representatives and other positions across the country. More positions will be available in coming weeks and months. Interested in a career change? Check out the opportunities at USAJOBS.gov.

Now It’s the Employee Retention Credit Scam

In case you’re keeping count, this is my sixth blog in 2022 about scams being perpetrated on vulnerable taxpayers to steal their money and financial information. From phishing to ransomware to IRS impersonator calls, scammers adapt to any method that works. Scammers also take advantage of current events where they can cash in, like those involving donations, like natural disasters, and tax programs, like the Employer Retention Credit (ERC). 

The ERC is a refundable tax credit for eligible businesses who continued paying employees while shutdown or suffered significant declines in gross receipts due to the COVID-19 pandemic. Eligible business taxpayers can claim the ERC on their federal employment tax return, IRS Form 941.

Scammers jumped on this money making opportunity, contacting employers by email, phone, and text to “help” them get the ERC, even if the employer doesn’t qualify. The scam works by charging an upfront fee, whether or not the employer gets the ERC. Businesses should be wary of advertised schemes to file for the ERC and recognize direct solicitations promising tax savings that are too good to be true.

To be eligible for the ERC, employers must have:

  1. Fully or partially suspended operations due to orders from a government authority that limited business activity, travel, or meetings due to COVID-19 during 2020 or the first three quarters of 2021, 
  2. Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021, OR
  3. Qualified as a recovery start-up business for the third or fourth quarters of 2021.

Also, for any quarterly payroll reporting period, eligible employers cannot claim the ERC on wages that were reported as payroll costs for Payroll Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.

Falling for an ERC scam can be very expensive. Taxpayers are always responsible for the information reported on their income tax return. Improperly claiming the ERC could result in repaying the credit, plus penalties and interest. And that’s on top of the scammer’s fee.

Scammers and unscrupulous third parties can be persuasive. It’s their job. So don’t feel bad or cast blame if you or a business owner you know fell for the ERC scam. Good news – it’s not too late to fix the situation. Employers who filed for the ERC in error, intentionally or under the advice of an unscrupulous third party or scammer, should file amended employment tax returns for the applicable reporting periods.

Want to know more about the Employee Retention Credit and see if your business is eligible? It’s all right here on the IRS website – https://www.irs.gov/coronavirus/employee-retention-credit.